Market Overview

Why This Month's Cannabis Market Downturn Is No Cause For Alarm


The cannabis industry is ground zero for the 2018 and beyond version of the gold rush, as financial experts project that it will grow into a $32 billion market. However, investors should expect a downturn throughout the rest of this quarter, as many hot ticket cannabis stocks have, and will continue to plunge.

Many investors flocked to the Toronto Stock Exchange since Ontario legislators are pushing to pass the Cannabis Act this summer, which would legalize the substance for recreational use.

With the passage of this legislative seemingly a formality, investors began buying Canadian medical cannabis stocks like Cannabis Growth Corporation (TWMJF), Aurora Cannabis (ACBFF), and Aphria Inc. (APHQF) in droves.

The cannabis investment market surged until the end of last month, in which Canopy Growth took a tremendous hit, dropping 30% in market value. While Aurora and Aphria experienced similar losses, Canopy Growth’s downfall will have the most significant trickle-down effect, since it’s the world’s largest publicly traded cannabis producer.

It’s clear that the United State’s pushback on the cannabis legalization revolution is also a reason for concern for cannabis stock investors. Attorney General Jeff Sessions has waged war on cannabis publicly in ways we haven’t seen since the War on Drugs.

Most recently, Sessions vowed to rescind the Cole memo. This memo is the lynchpin that allows the federal government to be lax on marijuana criminalization, and would strengthen the Federal government’s reach to push offenders in each state -- since marijuana, even in legal states, is a Schedule I drug.

To further complicate cannabis stock progression in the United States, marijuana businesses can’t accept tax deductions.

So what does this recent downturn mean for cannabis investing moving forward?

Investment experts are optimistic.

Those following cannabis stocks argue that these investments are right on time in its stock market cycle. The note that these stocks are going through a timely transition, in which it begins to hit a slow, yet steady trading phase. They suggest that cannabis investors move to focus on high-quality stocks, as they also build cash reserves.

Motley Fool echoes this thought when taking a look at Scotts Miracle-Gro (NYSE:SMG), which dropped close to 16% last month. This is a major measuring stick, since this fertilizer company is a huge contributor to cannabis growing companies. However, these experts state that this drop in performance was because of their Q1 result release, and that it should pick up performance soon.

In terms of the cannabis legal battle hampering investment growth, localities everywhere are fighting back. This backs legal experts’ assertion that Sessions’ crusade is backfiring, and helping the efforts for cannabis legalization, rather than hurting it.

Just this week, the city of Berkeley, California made news with a resolution that would establish full sanctuary for recreational marijuana. The city states that they won’t use any resources whatsoever to enforce federal cannabis laws.

This sets tremendous precedent in the United States, as no locality has taken a step this significant.

The investment potential in Berkeley becomes abundantly clear, as marijuana tourism and vacation homes in the city will become attractive options -- especially since California legalized cannabis last year for recreational use.

In the same week, a Federal judge spoke out and stated that medical marijuana is a life saver that should be legalized across the board, and a trial in New York began to sue the Drug Enforcement Administration and Sessions for the substance’s illegal status.

As these details play out, it’s clear that the recent downturn isn’t necessarily a reason to panic, and investors should stay tuned for further advancements throughout the next quarter.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributor contributorsNews Sector ETFs Emerging Markets Legal Markets ETFs


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